Italy Scours Deals Abroad for Elusive Tax Revenue

By

Alessandra Galloni And

Deborah Ball

Updated Jan. 29, 2013 7:40 p.m. ET

Italy, which has one of the biggest tax-cheating problems in the developed world, is cracking down on suspect offshore investments as part of an unprecedented drive to find new sources of tax revenue and ease concerns about its €2 trillion ($2.69 trillion) in debt.

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'I and the other people involved have always done things legally,' said Matteo Marzotto, pictured with his mother, Marta Marzotto.
Getty Images

Italy just added a new property tax and is boosting its sales taxes to narrow its fiscal gap. In an effort to claw back an estimated €120 billion a year in unpaid taxes, it has limited cash payments to €1,000 so that untaxed money can't slosh around the economy without leaving a paper trail and is hunting down people who buy luxury yachts yet report little income.

One of the brightest spotlights is on companies suspected of earning money or shifting it abroad to avoid paying Italian taxes. Italy netted €600 million in additional taxes last year after prosecutors pursued two cases involving money stored illicitly to Switzerland. Tax police have recently carried out audits of big corporate names, including Google Inc. and eyewear maker Luxottica SpA. And Domenico Dolce and Stefano Gabbana, founders of the fashion house Dolce & Gabbana, are on trial on charges that they sold their two main labels to a Luxembourg holding company in order to evade Italian taxes. The two men deny the charges.

In one high-profile case, prosecutors are investigating whether nine members of the Marzotto family, a northern Italian textile-making dynasty, and four managers dodged €65 million in Italian income taxes with the 2007 sale of fashion house Valentino through a Luxembourg holding company.

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In the Valentino case, whose details The Wall Street Journal has pieced together by examining court documents and talking to investigators and Marzotto family members and their lawyers, prosecutors say taxes should have been paid in Italy, where they say the deal was planned and sealed.

Acting on prosecutors' requests, tax police in November confiscated an 18th-century estate, a luxury Alpine villa, apartments and land valued at €65 million belonging to the 13 people under investigation.

Lawyers representing the individuals, who haven't been charged with any crime, say taxes were legitimately paid in Luxembourg, where the holding company that housed the stake was based.

Boats Become Tax Target in Italy

"I and the other people involved have always done things legally," said Matteo Marzotto, one of the family members under investigation. He said the sale of Valentino Fashion Group, or VFG, to London private-equity firm Permira Ltd. had been communicated to Italy's stock-market regulator and to the media without any attempt to hide details.

Italy isn't the only place in Europe where the government is taking a hard look at offshore subsidiaries that companies establish to pay lower taxes. Last year, Nissan Motor Co., Starbucks Corp., Google and Amazon.com Inc. came under parliamentary scrutiny in the U.K. for their use of offshore centers, some in Luxembourg. British tax authorities say they haven't opened any inquiry on the companies. All the companies say they acted properly.

Italian tax authorities said last month they were investigating Google's practice of booking Italian-based ad sales in Ireland, where the company pays a lower tax rate than it would in Italy. Google says it isn't trying to evade Italian taxes and that it follows the law. Last week, tax police carried out checks at Luxottica to see whether the world's biggest eyewear maker has complied with so-called transfer pricing rules, or tax rules dealing with transactions between company units in different countries. Luxottica said its tax planning is entirely legal.

Lt. Col. Gianluca Campana, who runs the income-tax division of the Guardia di Finanzia, Italy's financial police, says his teams are pursuing international tax evasion more aggressively than in recent years in part because "whoever transports money abroad is stripping Italy of wealth, and it is important to limit the flight of capital abroad."

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Police seized this villa in Vincenza, Italy, owned by the Marzottos.
Umberto Nicoletti

Italy lost €17 billion in undeclared or under-declared income from foreign sources last year, compared with €11 billion for 2011, according to the financial police. Luxembourg is the biggest single country used by Italian individuals and companies seeking to hide money abroad, the police said, followed by Ireland and Switzerland.

Italy's state tax agency has also stepped up its checks, auditing in 2011 more than 2,700 companies with at least €100 million in revenue, five times the number of audits in 2007.

At the heart of the Valentino case is a Luxembourg holding company, called International Capital Group, or ICG, that was set up in 2006 by Marzotto family members to group the 29.6% combined stake they owned in VFG. VFG owned the House of Valentino and a stake in German fashion label Hugo Boss. The Marzottos said at the time they wanted to consolidate their stake as a way to manage and grow Valentino.

The grouping of the shares fueled speculation that the Marzottos were actually going to sell Valentino Fashion Group outright—rumors that Matteo Marzotto denied at the time. "I'm certainly not going to sell," he told reporters during a fashion conference in November 2006.

On May 16, 2007, ICG sold its 29.6% stake in VFG to Permira for €738 million. Permira would go on to buy out the whole company later that summer for €2.6 billion.

Permira didn't return phone calls seeking comment.

In 2008, ICG filed a tax return in Luxembourg, declaring that it had earned €199 million from the sale. On that capital gain, ICG subsequently paid a "very small amount" of taxes in Luxembourg, according to a person with knowledge of the tax filing.

Two years later, Italy's tax agency began looking into the Valentino sale and notified prosecutors, who launched a criminal investigation for alleged tax evasion. Prosecutors Laura Pedio and Gaetano Ruta, who have been investigating the matter, say the 13 people under investigation created ICG for the purpose of evading taxes on proceeds of the transaction because they knew a sale of the fashion group was likely.

"The most delicate phases of the VFG affair" were conducted in lawyers' and bankers' offices in Milan and Rome or in the private homes in Italy of brothers Vittorio and Matteo Marzotto, according to a November asset-confiscation order reviewed by The Wall Street Journal.

Prosecutors say they found a memo showing that in 2008, the Marzotto family members sought the advice of a tax lawyer, who advised them to file an Italian tax return on the sale, which they didn't do.

Niccolo Ghedini, a lawyer for three of the Marzotto members, said the family also had received legal advice that they need not file an Italian tax return. "The fact that meetings were in Italy is normal and means nothing," he said. "The point is that ICG's shareholders sold the stake in a very clear and transparent way and paid taxes in Luxembourg."

Marzotto family members and their lawyers dispute that ICG was created to cut their tax bills. In a memo prepared for tax authorities while the investigation was continuing, Vittorio Marzotto wrote that the sale to Permira was an "unhoped for and unexpected" outcome.

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